I'm a thirty-year veteran of Wall Street and an outspoken critic of ineffective regulation and an advocate for economic and political sanity. Following a career as an in-house lawyer and industry regulator, I am now in private practice representing member firms, registered persons, Whistleblowers, and defrauded investors. I publish the RRBDlaw.com and the BrokeAndBroker.com websites.

5/17/2011 @ 8:58AM4,314 views

Estate Sues Over Lawyer's Designation of Ex-Wife as IRA Beneficiary

How closely must a broker and brokerage firm watch a client's affairs?

Newman Trowbridge, Jr. was a customer of Capital One Investment Services, LLC, which is a broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”). Rick E. Schenck, Sr. was a Capital One broker assigned to Newman Trowbridge, Jr.’s account.

In 1994, Trowbridge opened an Individual Retirement Account (IRA) at Capital One’s predecessor-in-interest through a previous broker. Thereafter, the account was assigned to Schenck, who in industry parlance is said to have “inherited” the account. The named beneficiary of Trowbridge’s IRA account was his then-wife.

For Richer or Even Richer

In 1999, the Trowbridges divorced after a protracted, bitter and acrimonious lawsuit. After the divorce, Trowbridge remarried and changed the beneficiary of several of his accounts (including his law firm’s profit sharing plan) to his estate.

SIDE BAR: After the divorce, Trowbridge remarried — so please distinguish between his “ex-wife” and “wife.” Moreover, keep in mind that after the divorce, Trowbridge changed the designated beneficiary for several of his accounts and added his estate as the replacement. Critically, among those accounts for which he designated his estate as the new beneficiary was his law firm’s profit sharing plan.

Trowbridge was considered an experienced attorney who made his own business decisions and seemed to largely call his own shots. Based upon those facts, it seems likely that he had a plan to restructure his holdings, beneficiaries, and estate. It also appears that he undertook steps towards achieving his desired goals.

Given all the dramatic foreshadowing, now let’s toss in the plot twist. After his divorce — after his remarriage — after he changed beneficiaries on a number of his accounts in favor of his estate, Trowbridge then rolled the balance of the law firm’s profit sharing plan into his IRA. This roll-over quadrupled the balance that had been in the IRA account.

Death Be Not Proud

Upon his untimely and unexpected death in 2009, Capitial One paid the IRA account balance to Trowbridge’s ex-wife, who was still named as beneficiary.

SIDE BAR: No, that wasn’t my typo. The IRA account’s beneficiary when it was established at Capital One was Trowbridge’s then-wife, who subsequently became his ex-wife. For whatever reason, Trowbridge never deleted the ex-wife as the named beneficiary in the IRA account. Given all the known facts and circumstances, this seems to be a classic oversight.

The Stuff of Lawsuits

In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in May 2010, the Estate of Newman Trowbridge alleged that among other things, Respondents were guilty of negligence and a breach of fiduciary duty when they failed to advise Trowbridge to designate Lee Trowbridge (apparently, his surviving spouse) as the IRA beneficiary in order for his wife to be recognized by Respondent Capital One as the owner or beneficiary of his IRA account.

Claimant sought at least $184,321.43 plus interest of nearly $9,000 in compensatory damages, attorneys’ fees of $25,000.00, costs of $16,425.00, and additional damages as may be reasonable and appropriate. In the Matter of the FINRA Arbitration Between Succession of Newman Trowbridge, Jr. through its Executrix, Lee Trowbridge, Claimant, vs. Capital One Investment Services, LLC, and Rick E. Schenck, Sr. Respondents (FINRA Arbitration 10-02435, May 9, 2011).

The Respondents generally denied the allegations and asserted various affirmative defenses.

So Ordered?

Claimant contended that Trowbridge’s widow (also the estate executrix) presented Respondent Schenck with a court Order requiring that all account holders pay funds over to the estate; and, notwithstanding the Order, Respondents paid the funds to Trowbridge’s ex-wife. In pertinent part, the Order states:

It is further Ordered…that all banks,…or investment companies,… firms, [and] corporations…having in their possession any monies, stocks…or other rights or things of value, for and in the name of the decedent… are…directed to deliver and transfer [such things]… which form a part of the estate of the decedent…to the heirs of the decedent… (italics added)

The Respondents argued that the IRA passes outside of the estate (similar to a life insurance policy) and, as such, was not covered by the Order.

The FINRA Arbitrators noted that although the Order expressly lists six accounts to be paid over (including Trowbridge’s regular investment account with Respondents), the disputed IRA account was not listed in the Order. Moreover, the Panel determined that Respondents’ payment of the IRA to the ex-wife did not constitute a breach of the Order or of any duty that might have arisen from from Respondents’ knowledge of the Order.

Duty to Review?

In keeping with the securities industry’s Know Your Customer Rule, the Claimant argued that Respondents had a duty to periodically review Trowbridge’s accounts. Claimant suggested that such a review should have included a consideration of named beneficiaries in order to ensure that such were consistent with any changed circumstances in Trowbridge’s life. As such, if Respondents had discharged the duty that Claimant asserted existed, the inconsistent naming of the ex-wife as the IRA beneficiary would have become apparent to the Respondents and the ex-wife would not have benefitted from the dramatic increase in value when Trowbridge rolled the proceeds of his profit sharing plan into the IRA account.

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The guy was a lawyer who didn’t know enough to change his IRA beneficiary? Perhaps he meant his ex wife to have it. Even after a very shocking and acrimonious split with my ex I left him as my 401K beneficiary for a long time because we had a verbal agreement that he would take our pets if anything ever happened to me. Anyone on the outside would have thought my beneficiary was a mistake, but it was not. Lesson learned: keep up with your financial affairs.

Bill, Thank you for calling attention to this extremely common situation! When we take on a new client, reviewing the nitty gritty details in the will, insurance policies, IRA and Pension accounts is one of the first tasks we undertake on behalf of a client to avoid this very ugly, unfortunate dilemma. More than fifty percent of the time, we find and fix problems. We also pose the following question to each spouse: “If you pass away and your spouse subsequently chooses to remarry, are you comfortable with his/her new spouse having full access to all of your financial assets?” And then we ask “if you are not, what have you done to protect those assets for your spouse, children, and grandchildren?” Most answer “no” to the first question and have no idea how to answer the second. Thanks again Bill for a helpful article! All the best, Holly Magister, CPA, CFP www.WomanEntrepreneur-ExitPromise.com

I’m a lawyer and, trust me (okay, not exactly a wonderful pairing of concepts, right?), I forget as much as everyone else. On the other hand, you are absolutely on point when you note the full range of possibilities — Trowbridge may have simply forgotten to make the final IRA beneficiary change, or he may have had some agreement with his ex-wife that no one knew about or even understood. Regardless, whatever his intentions were are now of no consequence as the law has directed the disbursements and transfers in accordance with whatever proof existed. Frankly, as most lawyers learn, clients tend to retain the most outdated Wills — often leaving bequests to deceased individuals or failing to address former/current marriages. I’m guessing that psychologically, many folks figure that if they don’t update their Wills that they won’t be tempting fate. While an intriguing theory, it doesn’t come close to addressing the catastrophe and hurt that outdated testamentary and non-testamentary dispositions can cause on those who expected or relied upon such bequests or gifts.

Ultimately, it would be wonderful if this little blog about Trowbridge prompted many readers to have that “Ah Ha” moment and re-visit their IRA beneficiaries, their Wills, and to re-think what will happen to their assets after they die.

One thing for sure — folks may laugh at Trowbridge’s apparent “negligence” but, boy, do you have it right: This is an “extremely common situation.” When I discuss making plans to start up a new business with my clients, I discuss what I call the four dreaded D’s: Death, Disability, Divorce, and Disqualification. I actually wrote about those issues four years ago. Clearly, you and I are all too familiar with how folks seem oblivious to the potential problems that they may face over time.

Many thanks for you compliments! Look forward to exchanging comments with you in the future.

Three cheers for the Arbitrators! I say a deal is a deal is a deal. And a clear writing is always superior to an ambiguous inference, in this case only based on a “perceived” inconsistency with other clear writings. But whether oversight or intent, Mr. Trowbridge made his ex-wife the beneficiary of his IRA, period.